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Sugar prices to stay unchanged despite record production

Experts believe that with demand rising and only a small surplus in the global market, sugar producers will be encouraged to export more

Sugar, which left a bitter taste in the mouth in early 2010 because of high prices, may not be much sweeter this year despite record production expected in India and Brazil, the world's largest producers.

"We expect a record production of 25 million tonnes in 2010-2011 (October- September) in India," Prakash Naiknaware, managing director, Maharashtra State Cooperative Sugar Factories Federation told Moneylife. The Indian Sugar Mills Association (ISMA) has estimated production at 25.5 million tonnes based on figures of expected output for the 12-months period provided by sugar mills.

Sugar prices, which were about Rs50 per kilogramme in early 2010, have come down to around Rs30 per kilogramme now. However, sugar mills believe that prices are not expected to soften further in the near future.

"A few months back, the government estimated the sugar production for the 2010-11 season at 24.5 million tonnes. A better idea of the production estimate can be made at the end of this month. Therefore, the government's estimate of 24.5 million tonnes is not expected to make any kind of impact on prices as of now. The domestic production this year is expected to be about 20 -25 lakh tonnes more than the estimated domestic consumption," Abinash Verma, director-general, ISMA told Moneylife.

Prices, in the global market, are over Rs3,100 per quintal, while the ex-mill price of sugar is Rs 2,775 per quintal (without duty).  

Mr Naiknavare also feels that despite a record production in the country, prices in the domestic market would not come down. "Prices in the domestic market will neither come down nor go up; it will remain stable at the current level of Rs27.50 per kg (ex-mill, without duty)," said Mr Naiknavare. In 2009-2010, the country produced 18.8 million tonnes of sugar.

"In the first quarter of 2011, the sugar market will remain stable. If the production anticipation comes true to around 25.5 million tonnes, then price may fall, but everything will depend on the government's policies on exports and the monthly sugar sale quota," Mukesh Kuvadia, secretary, Bombay Sugar Merchants Association told Moneylife.

The Australian Bureau of Agricultural Resource and Economics (ABARE) has in a report said that a large increase in production is expected in India and Brazil. Brazil's sugar production is expected to go up by 6.6% to 42 million tonnes. In India, sugar production would increase by seven million tonnes to 27 million tonnes, as higher prices have encouraged a 10% increase in cane planting in 2010-2011 and yields have benefited from above average rainfall during the monsoon, ABARE said.
 
However, according to ABARE, the European Union, Australia and Thailand are likely to be under-performers this year.  The supply of sugar will remain tight in the international market until the Brazilian cane crop lands in the market. The Brazilian crop is expected to reach the market around end-March. However, prices in the international market may see some downtrend in the next few months, experts say.

"The present price rise in the international market is not driven by fundamentals, so prices would come down slightly globally," Mr Naiknaware said.

"As per estimates of the International Sugar Organisation, there is hardly any surplus in the international market. The international market is already aware of the very small surplus and it is expecting exports from India," said Mr Verma. "The government has also permitted exports of 5 lakh tonnes which is in addition to 15 lakh tonnes already permitted in the past three months for exports against the Advance Licensing Scheme and the sugar lying at the ports. These exports have started and the exports against 5 lakh tonnes under the open general licence (OGL) will happen after a few weeks, when the contracts between sugar factories and exporters are finalised. It is to be seen whether these physical exports will have any impact on the international prices or not. This will depend on import demand which may still require some more imports especially from India."

On the anticipation of production of 24.5 million tonnes of sugar this year, despite the damage of cane crop due to unseasonal rains in the main sugar-producing states, the government has allowed export of 5 lakh tonnes under the OGL. Under the OGL, mills can export sugar without any restrictions or conditions.

Sugar mills in Maharashtra would be largely benefited as out of the permitted quota for export of 5 lakh tonnes, nearly 2 lakh tonnes will be exported from the state, at a time when globally prices are rising.

"For Maharashtra, we expect the upper limit of 9.5 million tonnes and the lower limit would be 9.3 million tonnes this year. The state is ideally located for exports as it has two large ports, the Mumbai Port and the Jawaharlal Nehru Port. Out of the permitted quota for export of 5 lakh tonnes, the state has got the quota of 2 lakh tonnes which will help to keep prices firm," Mr Naiknaware said.

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